The finance minister today announced 40% of the lump sum withdrawn from the National Pension Scheme will be made tax-free. A look at the implications of this move and if it makes the NPS more attractive.
The government has done this to ensure tax uniformity between defined benefits (GPF) and defined contributions schemes (NPS). It has now made EPF Contributions from April 2016 taxable!
Note: My understanding: GPF rules remain the same. It continues to be tax-free. By the same token, Govt NPS corpus should also tax-free (official clarification awaited though)
Links for EPF subscribers:
Here is full budget speech
Assuming other rules remain the same,
- 40% of corpus is tax-free (Budget 2016 recommendation) upon withdrawal.
- rest will be taxed as per slab when withdrawn or can be annuitized (the 40% min annuity recommendation appears to be removed. Require confirmation)
All Contributions + interest –> 40% EEE + 60% EET (both investment and interest tax free)
Does this make the NPS attractive now?
If you do not mind the lock-in up to age 60 (80% has to be annuitized if withdrawn before) then NPS was always attractive*. Now even more so!
I suggest you use the NPS for your debt component and use stocks and/equity mutual funds for your equity allocation. You can choose the ‘C‘ option – low duration corporate/bank/psu bonds. Avoid the ‘G‘ option – long-term gilts.
Read more to Ddecide on the asset allocation for a financial goal
* Beware: The concept of a locked-in retirement corpus can be quite dangerous.
If the lock-in does not appeal to you stay away from NPS. Personally, I hate lock-in and standby what I wrote earlier:
- National Pension Scheme (NPS): Do not invest even if you get tax benefits!
- Do Not Invest Rs. 50,000 in NPS For Saving Tax!
Pension is not guaranteed! Returns are not guaranteed! The annuity has to be purchased from an insurer. All you need is money to purchase the annuity. Not NPS! You can get them from anywhere!
If you are an existing subscriber, this is great news. Do not invest in NPS because of this announcement. It ought to be clear enough now that the government cannot make the entire withdrawal tax-free!
Read more: Budget 2016: What should we do now?
PS. This is terrific news for government employees!